Eurozone manufacturers are facing profound challenges. Given the region’s Purchasing Managers’ Index (PMI), which has dropped down to 48.5, its lowest point since January 2024. The drop in this index continues to add to the cloudy picture surrounding the state of our manufacturing sector. It’s continuing to shrink, despite having recently started building positive momentum since late in 2021.
For comparison, the Euro-region manufacturing PMI just increased to 49.4, a 16-month-high reading since August 2022. Yet, it is still under the key 50 threshold, meaning that sector is still in contractionary territory. This creates some serious questions around just how resilient manufacturers truly are. Their apparent unwillingness to adapt to changes in exchange rates, especially in light of the euro’s recent swings against the dollar, is troubling.
The EUR/USD currency pair retreated to 1.1300, down roughly a third of a cent from overnight peaks. This kind of movement would entail an uncomfortable degree of volatility and instability that would be damaging to their export competitiveness for Eurozone manufacturers. As analysts caution, manufacturers can’t be expected to absorb a currency shift of 10% plus in perpetuity. Inflationary and recessionary economic pressures continue to threaten overall margins and profitability.
The PMI index has been trending downward for months. It has been floating down over the last several months. This trend is deeply worrisome especially considering that the manufacturing sector was on a roll from last December. Expectations about generous spending plans from the incoming German government have stoked hopes about possible growth in the sector. Mystery remains as new questions come up. Will the rest of the Eurozone follow suit in increasing underwhelming budgets with inflation outrunning nominal increases?
Even as manufacturers learn to live with these stresses, they need to plan for outside forces that could make their predicament worse. The recent volatility in the EUR/USD exchange rate just makes it that much harder for businesses. This is particularly the case for those that depend on international trade. Given how many firms are still reeling from past economic shocks, any additional economic downturn would be detrimental to their fiscal health.
Here’s our macro analysis of what the latest PMI data are telling us about the Eurozone economy. Manufacturing output has been uniquely susceptible to domestic policy decisions and global market dynamics. While a few analysts continue to be hopeful for a quick recovery, the continued contraction is a clarion call to all stakeholders that we must proceed with caution.